Global markets expert Robert Yeung on the attraction of SSA bonds

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This article originally appeared in FinancialPipeline.com.

The recent rising-interest-rate environment has been difficult on the economy and on consumers, and it has translated into pain and uncertainty in most asset markets as well.

The one positive outcome of higher rates is that fixed-income products such as bonds are back as viable investments. But there’s also evidence to suggest that bonds have become more volatile than some risky assets, like gold.

So, how does one navigate this? And where do the professionals put their money?

The SSA bond market

The answer lies in yet another financial acronym: the SSA market. SSA stands for Sovereign, Supranational and Agencies. I would argue, however, that it should stand for “Sound, Sustainable and Attractive.”

This is the bond market that banks and “official money” – governments, central banks, sovereign wealth funds, and SSA issuers themselves – put their own money in by the billions. It’s also one that lends itself to the back-to-basics approach of buy-and-hold-until-maturity investing, the way your parents invested in bonds.

SSA issuers

The SSA market consists of a wide range of issuers that generally have links (owned or supported) to one or more governments (which can be federal, state or even municipal) and were established with a specific purpose or mission. The raison d’etre for each of these can be very specific segments of a country/economy or broader missions with international focus around development, poverty or equality.

Essentially, each is created to further its purpose where direct government(s) or private sector activity is unwarranted. In some respects, they represent more of an objective solution to the mission they support.

A few examples of these entities include the World Bank, Export Development Canada, the European Investment Bank, Rentenbank (Germany’s federal agricultural finance agency), the African Development Bank and KBN (Norway’s local government finance agency), among many others. Most are established as specialized banks or financial agencies to fund loans to entities and projects that further their stated purpose.

There are dozens of examples from all over the globe, but the caveat here is to understand the nature of the issuer and the level of support from its owners/sponsors. This is where an advisor could prove helpful in terms of knowing those details. A quick Google search is also a good place to start, since these issuers all have incredibly detailed and transparent websites that will highlight their creditworthiness and their missions.

Given all of this, why should SSA stand for Sound, Sustainable and Attractive?

Sound

Most SSA issuers are highly rated, with many having “AAA” status with various rating agencies. While that’s a great marketing point for them, rating agencies don’t always get it right.

Beyond the ratings, it’s important to note that most SSA issuers will have some form of credit support from their owners/sponsors. Since most of the owners/sponsors have taxing authority, they have the financial ability to (and are obliged to) support the SSA issuer in times of financial strain.

The majority of SSA issuers are themselves established as extremely conservative financial institutions. Their model is to prudently use the money they “borrow” from issuing bonds to lend within their specific purpose/mission. Furthermore, given their status, in many cases they can command “preferred lender” status that ensures they are at the front of the line if their borrowers come under pressure.

Finally, the conservative nature of these institutions means they also are mandated to have extremely high cash reserves on hand. Many will have 12 to 18 months’ worth to sustain longer periods of market turmoil and uncertainty.

All of these factors combine to create a safe and sound institution, and therefore their bonds are typically viewed as safe investments. Banks, governments and other professional investors buy these bonds by the billions given their relatively safer profile and low probability of default.

A final point to make on safety: The SSA community generally issues bonds with two- to 10-year maturities, with a vast majority of their funding being for less than five years. Therefore, there’s naturally less of the price/yield volatility than in long term (such as 30-year) government and corporate bonds, which means SSAs can also be a good fit for individual or family investors, not just bank and government liquidity pools. These are more “natural” terms to be able to hold to maturity with the above-mentioned comfort that the entity will be there when the bonds mature.

It’s “buy ’em and forget ’em” – the way a conservative investment should be.

Sustainable

Many of these institutions are established to promote specific ideals or to support causes and communities. This is particularly true of the supranational issuers who could in theory also be characterized as charities.

As mentioned above, many of these were established to promote solutions to situations where specific national, commercial or private interests are not warranted – so by definition many of these issuers are promoting various aspects of ESG.

Furthermore, independent of their “do good” credentials, this market has also been on the forefront of ESG finance going back decades.

But as green and other stripes of ESG investments continue to expand and evolve, the SSA crowd has established itself as a first mover and has spearheaded innovation, which means SSA investments have a strong ESG component.

Attractive

Like all investments, SSAs must have an attractive return profile to justify consideration, and they typically do.

They tend to trade with a positive yield spread (aka more yield) than the equivalent government treasury bond of the same maturity. Therefore, there’s more yield for a safe – and in some cases safer – investment than a government bond of the same term. Yields on this group are generally lower than those issued by financials or corporates, but when considered on a risk-adjusted basis, they remain compelling and are significantly more liquid.

Given the current uncertainty of the markets and some high-profile collapses in recent months, the safety of this group makes them more attractive than ever. With the variety of SSA issuers and jurisdictions, investors have the ability to trade risk and return – even within the space – for those looking for higher yields.

The SSA community is also active in many different bond markets and currencies (some have issues outstanding in more than three dozen markets at any time). For investors who have cash balances in other currencies, or want to play new markets in a safer manner; chances are they will find bonds in the market they want without having to do credit work in unfamiliar jurisdictions.

SSAs in the current rate environment

Now that increasing yields have made bonds attractive, it would make sense to consider looking at where some of the largest bond buyers in the world put their own money for a sound, sustainable and attractive investment. Or at least find out more about SSA bonds from your financial advisor.

Robert Yeung is a global markets professional based in Toronto. He just announced that he is starting a new position as Executive Advisor at the Ontario Financing Authority. He has held leadership positions including Head of Global Equities and Financing Solutions and Head of Global Fixed Income Currencies and Commodities (FICC). Prior to those roles, he was Head of Europe & Asia Global Markets with overall accountability for developing and managing all trading and sales activity across the two continents, based in London. He has over 25 years of experience in the financial industry with roles in Toronto, Hong Kong and London at two Canadian chartered banks. His deep experience in fixed income trading, sales and origination/syndication as well as cross asset derivatives/structured products has enabled him to establish an international issuer account base and vast exposure to global financial trade.

He holds a bachelor’s degree from Wilfrid Laurier University, an MBA from Syracuse University and is a CFA Charter holder.

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